Basic Concept of Economics

What are the Basic Concepts of Economics?

The basic concept or elements of economics are: wants, scale of preference, choice, and opportunity cost.

1. Wants

Want may be defined as an insatiable desire or need by human beings to own goods or services that give satisfaction.

The basic needs of man include food, shelter, and clothing. There are many additional human needs that aren't classified as basic, as well. This includes tangible goods like houses, cars, furniture, electronics, and so forth. Other needs come form of services, such as tailoring, carpentry, medical care, and so forth. Human wants and needs are many and are usually described as insatiable because the means of satisfying them are limited or scarce.

2. Scarcity

Scarcity is defined as the limited supply of resources that are used for the satisfaction of unlimited wants. In other words, scarcity is the inability of human beings to provide themselves with all the things they desire or want.

These resources are scarce relative to their demand. For example, a student will need to buy school materials such as books worth $100, but she only has has only $50. Therefore, it can be said that the money the student has (her resources) will not be sufficient to buy all she needs. The available resources within the environment can never at any time be in abundance to satisfy all human wants. Since wants are endless and insatiable relative to the available resources, human beings have to prioritize. There would be no economic problem if resources weren't scarce. Hence, economics is sometimes called the study of scarcity.

3. Scale of Preference

Scale of preference is defined as a list of unsatisfied wants, arranged in the order of their relative importance. In other words, it is a list of our wants arranged by priority.

In the scale of preference, the most pressing wants come first and the least pressing ones come last. After the first in the list has been satisfied, then there will be room to satisfy the next want on the list. Therefore, choice arises because human wants are unlimited or numerous, while the resources for satisfying them are limited or scarce.

4. Choice

Choice can be defined as a system of selecting or choosing one out of a number of alternatives.

Human wants are many and we cannot satisfy all of them because of our limited resources. We therefore decide which of the wants we can satisfy first. Choice arises as a result of the resources used in satisfying these wants. Choice therefore arises as a result of scarcity of resources. Since it is extremely difficult to produce everything one wants, choice has to be made by accepting or taking up the most pressing wants for satisfaction based on the available resources.

5. Opportunity Cost

Opportunity cost is defined as an expression of cost in terms of forgone alternatives. It is the satisfaction of one’s want at the expense of another want. It refers to the wants that are left unsatisfied in order to satisfy another more pressing need.

Human wants are plentiful, while the means of satisfying them are scarce or limited. Therefore, we are faced with the issue of choosing one from a whole host of other human wants. A farmer who has only $20 and wants to buy a cutlass and a hoe may discover that he cannot get both materials for $20. He would then have to choose which one he has to buy with the money he has. If he decides to buy a cutlass, it means he has decided to forgo the hoe. In turn, the hoe is what he has sacrificed in order to own a cutlass. The hoe he has sacrificed is the forgone alternative—this is what is referred to as opportunity cost.

Opportunity cost should not be confused with money cost. Money cost refers to the total amount of money that is spent in order to acquire a set of goods and services. For example, a customer spends $20 in monetary cash to buy a pair of trousers. The $20 spent is the money cost.